Behind The Smiles: China "Prepares For The Worst", Will Counter All US Trade Penalties

On the one hand, recent tensions between China and the US appeared to have been defused following this weekend's visit by US Secretary of State Rex Tillerson to Beijing, where it was "all smiles" during his meeting with China's president. With warm words from Xi, Tillerson on Sunday ended his first trip to Asia since taking office, with an agreement to work together with China on North Korea and putting aside trickier issues. Furthermore, as Reuters adds, preparatory work for a meeting between Chinese President Xi Jinping and U.S. President Donald Trump has begun, China's Foreign Ministry said on Monday, after a weekend visit to Beijing by U.S. Secretary of State Rex Tillerson. The planned summit between Xi and Trump could happen as soon as next month in the United States.

On the other hand, however, China's government is already preparing for retaliation for what it deems an inevitable first trade war step by the US, and has been seeking advice from its think-tanks and policy advisers on how to counter potential trade penalties from U.S. President Donald Trump, "getting ready for the worst," even as they hope for business-like negotiations Reuters adds. The policy advisers believe the Trump administration is most likely to impose higher tariffs on targeted sectors where China has a big surplus with the United States, such as steel and furniture, or on state-owned firms.

China could respond with actions such as finding alternative suppliers of agriculture products or machinery and manufactured goods, while cutting its exports of consumer staples such as mobile phones or laptops, they said. Other options include imposing tax or other restrictions on big U.S. firms operating in China, or limiting their access to China's fast-growing services sector, they added.

Beijing was a particular target of Trump's rhetoric during last year's election campaign, and officials see some friction as inevitable due to China's large trade surplus, according to several sources involved in the internal discussions. China's State Council Information Office, the government public relations arm, and the Ministry of Commerce did not return requests for comment.

"There is still room for both sides to resolve problems through co-operation and consultation, rather than just resorting to retaliation," said a policy adviser who spoke on condition of anonymity. "But we should have plans in case things go wrong."

Premier Li Keqiang said last week that Beijing did not want to see a trade war with the United States and urged talks between both sides to achieve common ground. U.S. Treasury Secretary Steven Mnuchin also said last week that the Trump administration did not want trade wars, but that certain trade relationships needed re-examining to make them fairer for U.S. workers.

No major U.S. measures have been announced, and there were no public indications of Washington's intentions on trade at the weekend when Secretary of State Rex Tillerson visited China.

Meanwhile, maintaining the facade that all is well, Trump is expected to host President Xi Jinping next month.

A glimpse of the uncertain future, however, came on Saturday in a communique after a meeting of finance ministers at the G20 in Germany, which dropped a pledge to keep global trade free and open, acquiescing to an increasingly protectionist United States after the two-day meeting failed to yield a compromise. The sources said China could step up some imports from the United States and boost its investment there to help create more jobs as a goodwill gesture, but would not meekly accept any unilateral U.S. action.

"We will have contingency plans to cope with the worst policies from Trump," said a second policy adviser. Trump has previously threatened a 45 percent tariff on China's exports and frequently said on the campaign trail that he would label China a currency manipulator, even though Beijing has not been actively weakening the yuan in recent years.

In an interview with Reuters on Feb. 23, he declared China the "grand champions" of currency manipulation. "It's hard to say his views have changed or he has become more pragmatic," said the first adviser. Mnuchin has pledged a more methodical approach to analyzing Beijing's foreign exchange practices.

Under the three criteria set by the U.S. Treasury to determine whether a country is manipulating its currency for a trade advantage, China only meets one: running a trade surplus of more than $20 billion with the United States. The U.S. Treasury's next report on the issue is due in April. China's surplus with the United States fell by $20.1 billion to $347 billion in 2016, the U.S. Commerce Department said on Tuesday, while Chinese data put it somewhat lower.

One of Reuters' sources said he thought it unlikely that Trump would label China a currency manipulator. "If he does that, China will let the yuan go, and the yuan will fall sharply," the source said. Weakening the yuan or dumping some of China's massive holdings of U.S Treasuries could be considered only when trade relations deteriorate sharply, the sources said.

Earlier this month, former commerce minister Gao Hucheng said during the annual meeting of parliament that China was not afraid of a trade war, though it hoped to avoid one. "We are willing to deal with it properly, but we are not afraid. Once the U.S. side take certain measures, we will evaluate and analyze such measures, and take actions when necessary," Gao said.

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Finally, in a parallel report from Axios, the website cites China expert Richard McGregor who lists 5 things he believes Xi wants from Trump in order to maintain cordial relations between the two nations:

Don't upend the status quo with North Korea: China's worst nightmare is that the regime would collapse and be subsumed by South Korea, which would make for a U.S.-ally on their border. It needs North Korea as a buffer state. Contra Washington conventional wisdom, the Chinese can't just snap their fingers and tell the North Koreans what to do. China and North Korea deeply distrust each other. So the Chinese hope Trump's tough talk is just bluster.

Avoid a confrontation in the South China Sea: Xi will likely deliver to Trump a quiet warning on the South China Sea. During his confirmation hearing, Rex Tillerson told Senators China needed to stop its island building there. The Chinese want Trump to understand they will defend their interests if the U.S. pushes back. (See our Facts Matter on the South China Sea.)

Stick to "One China": Regarding Taiwan, they want Trump to stick with the "One China" policy. Xi was furious when Trump took a call from Taiwan's president, and wouldn't speak with him over the phone until Trump agreed to support the status quo. (See our Facts Matter on the One China policy.)

No trade war: The Chinese, like everyone else, don't know what Trump might do on trade. They are closely following the reports about the tussle within the White House between nationalists (especially Bannon and Wilbur Ross) and the Goldman Sachs wing, led by Trump's chief economic advisor, Gary Cohn. As Axios revealed: trade in automobiles is the big sleeper issue.

The big picture: Xi wants a stable international environment that allows China to continue to develop and accumulate wealth and power. They abhor the prospect of military disruptions and interruptions to trade, with Xi going to Davos this year to sell China as an apostle of the open international order to all the folks Bannon would call "globalists." McGregor says China's ideal state for America is "slow and steady bourgeois decline." Anything too chaotic — Trump's MO, basically — hurts China.

Clearly, point #4 will be the most controversial one in the coming months.

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Yes. My house is only 1 year old and Ive had 3 sink supply valve fail already.....made in china. So I ordered all new Brasscraft made in USA valves at twice the cost, but a fucking whole lot cheaper than the house flooding while Im gone fishing or something.

We all know inflation is coming BIG TIME. Trump is preparing to save this nation from Venezuela type collapse by returning manufacturing hubs home. If you make it at home, and homes currency tanks vs foreigners, EVERYTHING made at home maintains equilibrium.

Us Markets are assumed to allready be collapsed. Chi Choms arent dumb enough to believe the US "markets" will be there in 2018. Actually most anybody outside the US Ministry of Truth's coverage area, has dialed that way back as well. Us has one main market and its bring it loud and clear: WAR.

You have to build the plant, hire the people, train the people. How long before products get onto store shelves? Fast enough to avoid economic catastrophe? And if plant workers get paid decent wages the products will still be much more expensive.

Trump's tax plan not even going to happen until 2018....

How are you going to convince companies to build here, when Trump could get voted out in 2020 and an uber-prog could reverse everything he does?

Many of the plants already exist but sit abandoned. Construction workers can rehab the old plants which creates jobs. Then you go to the local collages and post job/apprentice programs linking students with companies. All of this can happen within 1-2 years.

Trust me, I want USA to make things again and not have to rely on other countries, I just wouldn't bet on it happening. Even more so since I've seen Trump and the Congress GOP's behavior since the election.

There's nothing I'd rather see than manufacturing jobs you raise a family on, have the mother stay home and raise the kids. Sounds like too good to be true... right?

And AGAIN, why would companies invest and build here when things could swing over to DNC power in 2018 and 2020 if Trump doesn't improve things markedly

There are USA made products right now. They cost more and require researching for them. Most cannot be found in the big box stores. Small appliances will be more difficult, but building materials are available now. Supply and demand will raise the prices way up.

No problem. Other nstions can do manufacturing. No need to be dependent on dishonest trade partners. Whoever we select to do manufacturing will spend their dollars here. Our trade partners should ideally come from friendly nations with decent honest people. They will end up as your neighbors or landlords. They may own the US corporations we work for. Too bad Bill Clinton did not choose wisely.

The next market collapse will be worldwide. The real question is which country will allow the free market and come out of it first. We are only 18% of China's market so they do have some wiggle room. Sadly it is time for the next world war.

A slow, steady bourgeois decline does not work for me. How about a return to moralism and independence and then creating a new "balance" with the rest of the world based on that? That should work for China, without being a pushover and without theatrics.

He's proven over 30 years of business that he negotiates from a position of strength. You either do it his way or you lose much, much worse. We can live without China. We can make our own crap again. We can mine our on rare earth minerals again (yes, we have oddles of idle rare earth mines) .

China can not survive without the US. A year or two without 200 million people working in manufacturing would cause riots/uprising that would shatter China. Remember, China is communist, they do not have a "social welfare" system. No unemployment benefits, food stamps, etc.

China would implode in months.

The Donald will win and he'll win BIGLY. No doubt on this one.

Mexico is finished too. He won't even let Mexico save face. You don't say fuck you to Donald Trump and survive (Vincete Fox). That's a fucking fact! All of Mexico will pay for their leaders and former leaders big mouths. The Donald DOES hold a grudge.

Exactly! And Trump knows and has said this. It would bring manufacturing home quicker than anything imaginable. China would implode in months.

I've worked all over the world, lived all over Asia. China is fragile. The government fears riots. When they have riots it's not 1000 protesters it's 10,000 protesters. How many police does it take to quell 1-10 million protesters? More police than they have.

That's all any politician fears. Why do you think socialism is such a siren song for the stupid, as well as those in power? Nothing keeps the masses from buying rope like entertaining diversions and free shit. They are running into the same problem that the western world is - only so much of other people's money to go around.

China is going to pop if we really dig into a trade war or not. Massive debt, massive fraud, massive corruption. Not exactly a recipe for success.

If China wants to continue on the path of economic growth and maturity then I submit they will have to change their ways. No more dumping and stop with the constant theft of copyrights and intellectual property.

Nothing lasts forever and that include an America full of big box stores stocked with cheap Chinese goods paid for by welfare families supported by an ever-shrinking taxpayer.